We have discussed in general the issues that dominate the challenge before the RBI in determining who amongst the 26 Banking license applicants should be given the licenses.
To start with, there are divergent views on how many licenses need to be issued. At one end of the spectrum, some feel that there is no need to start with a restrictive frame of mind since India needs many more Banks. However, conservative observers feel that there is a need to ensure that only a few licenses need to be issued. Banking is a sensitive industry and even “Competition” is harmful if it reaches undesirable levels. We are all aware how the NBFC sector was irretrievably affected by companies like CRB Capital which in its greediness to grow offered 17% p.a returns on fixed deposits and dragged the whole industry into disrepute. Even today, many of the private Banks suffer because they compete too aggressively on advances.
It is necessary for us to distinguish Banking from Money Lending. Money lending is done with own funds and the money lender can be as aggressive as his capacity to lose permits him. He can also expect usurious rates of return to compensate for his risks. He can also mobilize bulk deposits from friends at higher than market rates as long as they are aware of and partake the risks. Banking is different. It is essentially a means for channelizing public savings. Hence “Safety of Deposits” assumes priority. This requires conservative approach to lending. Too much of aggressiveness in lending is therefore harmful. Similarly for Banks, too much of aggressiveness in deposit mobilization offering impractical rates of interest is also undesirable.
The capability of the licensees to do successful Banking therefore needs to be assessed with this basic distinction in mind as to whether the licensee is likely to be a “Good Banker” and not whether he can be a “Good Money Lender”.
In order to develop some objective frame of reference to evaluate the 26 applicants, I have listed the following 14 criteria for evaluation.
(a) Deposit Mobilization
(b) Retail Lending
4. Priority Sector Lending
7. Managerial Reputation
10. Cultural Compatibility
11. Investor Friendliness
12. Security of Deposits
14.Crisis Management Capability
It is possible that different analysts may adopt different criteria for evaluation and RBI may have its own criteria. But eventually there will be some commonalities in the parameters to be used for evaluation. Out of these parameters there could be some on whom an external analyst may not be able to get proper information to make an objective evaluation. Hence there could be some subjectivity in the evaluation. However when we create a matrix of parameters like above we are likely to reduce the effect of subjective bias and hence this approach is considered better. It is possible that some analysts may consider that some more parameters should be added to the above.
I will also try to expand the scope of each of the above parameters in some subsequent articles.
I invite suggestions from the public on whether we need to add any more parameters to the above. Readers may also take a second look at the previous related articles listed below for more information.
Here is a slist of first set articles so far placed on the website.